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Malaysia central bank to rule on sharia standardisation

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Points of Essence:

  • Malaysia’s Central Bank will issue guidelines on standardized application of Islamic finance contracts. Planned to be launched in the first quarter of 2009, the guidelines will set the features of murabaha, istisna, mudharabah, musharaka and ijarah as a benchmark in designing new Islamic financial products or enhancing the existing products.

KUALA LUMPUR, Nov 11 (Reuters) – Malaysia’s central bank will issue guidelines to encourage a more standardised application of Islamic finance contracts, its head said on Tuesday, aiming to tackle one of the chief challenges plaguing the industry.

The $1 trillion Islamic finance sector is divided on the validity of certain financing structures, due to varying interpretations of the sharia or Islamic law. This has resulted in some instruments issued in one part of the world being rejected as un-Islamic by some other centres.

The central bank of Malaysia, which has the world’s largest Islamic bond market, will issue guidelines in the first quarter of 2009 to determine the key features of Islamic structures such as murabaha, istisna, mudaraba, musharaka and ijara.

“These features will serve as a guide for the application of the sharia contracts for the Islamic financial products, which can be applied when designing new products or in the enhancement of existing products,” central bank chief Zeti Akhtar Aziz said in a speech.

Islamic banking has boomed on the back of a flood of Gulf oil earnings and rising demand for ethical investments. Sharia finance avoids interest-based lending and prohibits speculation, advocating instead a fair distribution of profits and losses.

The structures to be covered under the Malaysian central bank guidelines are some of the most popular Islamic finance contracts. Ijara is a leasing agreement while in a murabaha deal a financier, such as a bank, buys a commodity and sells it to the customer at a higher price, complying with Islam’s ban on interest.

With the musharaka principle, parties contribute capital to a project with profits to be distributed according to an agreed ratio while losses are generally divided as per the capital contribution ratio.

Under mudaraba, a bank will provide capital for a project while the entrepreneur will manage the deal. Profits are split according to a pre-determined ratio and the bank will bear any monetary losses that arise.

The central bank also launched on Tuesday an international sharia research academy to conduct research for the Islamic finance industry. (To read more Reuters stories on Islamic finance, click on [ID:nISLAMIC]) (Reporting by Loh Li Lian, editing by Liau Y-Sing and Tony Austin)



Written by Suapi Shaffaii

November 12, 2008 at 12:27 am

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